Friday, March 27, 2009

Once again, educational budgets are being threatened, this time by political leaders who let treasury officials tell them how to spend, the same way they allow the army general staff to tell them what to fear. Remember, Israel is a country where the norm is 40 students to a high school class, and universities are unable to cover their operating deficits; meanwhile, student achievement has slipped from the top of the Western pyramid to the bottom, teachers earn as much as secretaries, and professors earn perhaps half of what they would make abroad, where 3000 of them already reside.

I have known Finance Ministry employees. I bet the last thing on their minds is a desire to thwart educators. The problem is that most were themselves educated to monetarist logic at a time when "browsers" were still people who didn't want to pay for magazines. If you oppose them, you will meet with exasperation: "Our deficits have been pushing 4 percent of GDP, way above Europe. Before the crash, our debt service was something like a quarter of the budget, current low interest rates cannot last. Meanwhile, some 40-45 percent of spending already goes to social services like education. Do our teachers and professors expect us to cut more from the sick or the elderly - or from the 20 percent going to defense? We can raise tuitions, but parents and students (and professors, to their credit) refuse to allow this. We can print money, but then we commit to mounting shekel devaluations, which help exports in the short-term but discourage long-term direct investment. Do they want world capital markets, which are more skeptical than ever, to regard Israeli bonds as junk? Do they expect Obama to approve loan guarantees?"

The argument sounds compelling but it hinges on two outdated assumptions. The first is that spending on education is the same thing as adding an expenditure for the "social safety net," like welfare. Actually, in a knowledge economy, education should not be considered a welfare expenditure at all, but a revenue-generating capital investment, at least as important as an airport. It requires separate accounting treatment.

During last year's professors' strike, Hebrew University president Menachem Magidor projected that a lost academic year would cost the economy at least one billion dollars. Project, by the same logic, the net gain of getting more of our expat scholars to return, or of simply inspiring teachers to be more productive, to be willing, for example, to mentor students above and beyond the call of duty. The social chemistry that evolves within great schools or a community of scholars may be an end in itself but it is also of supreme economic value. Companies call this their intellectual capital.

WHICH RAISES THE second assumption, namely, that global investors will see a budget deficit and spook. Look, investors are already panicked by balance sheets at global banks nobody really knows what to make of. But one thing is sure: If Israel is viewed as a big commercial entity, its government's balance sheet will be analyzed like that of a software solutions giant like IBM, with perhaps a little tourism on the side - not like a bank, or even a manufacturer.

Already, major technology companies have market capitalizations that reflect perhaps 70 percent "intangible assets" - the chemistry I referred to above, the sheer capacity for productive innovation itself. One expat Israeli, NYU's Baruch Lev, has shown how companies that have cultivated their intellectual capital over a generation have significantly outperformed those that did not. Indeed, if you look at a survivor like IBM - at its stock price and earnings since the early 1990s, even as its markets for manufactured computers and peripherals evaporated - you saw investors sticking with the company because it invested massively in people. Its major asset is its reputation for delivering software solutions.

The point is, investors understand that it is IBM's capacity to innovate - to grow from its stream of products and their anticipated cash flows - that makes investment worth the risk. Okay, monetarists at the treasury are not wrong to worry about the shekel's stability, just as IBM's CFO worries about avoidable expenses that might force dividend reductions. But the key for Israel - a country that has engendered some 4000 start-ups - is to promise to keep new businesses forming.

Bond markets look at deficits, but they already assume that the only hedge against risk in Israel is a government that outruns deficits with above-average revenues from above-average rates of growth. Besides, venture funds and global technology corporations have done the critical foreign investing here over the past generation, not banks. An Israel that allows its educational system to decay is like, say, Libya allowing its oil installations to decay.

Investors, in short, care about Israelis sprouting new business technologies and also that the country will be more or less at peace. They expect Israelis to remain welcome in foreign conference rooms and that tourists will continue to come. If treasury professionals knew their jobs - security professionals, too, for that matter - they would consider how accountants conventionally write down intellectual capital as "goodwill," a semantic convenience, perhaps, but one pointing to a global asset. They would ask if Israeli teens will learn to inspire goodwill when they are 40 to a class, or, for that matter, when they are enforcing an occupation.

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